The next time you encounter a “talking head” pontificating about “where investors should be during this phase of the business cycle,” reach for the remote. During recessions the financial media invariably fixate on whether recovery has begun and what that portends for investors. However, economic indicators in fact provide no information that is useful with regard to the future direction of capital markets, and wise investors will ignore them.
This is not to say that business cycle data, such as the economic indicators tracked by our parent, AIER, are of no value. To the contrary this information can be quite useful. For example, a small business owner might hire or invest in inventory or equipment depending on whether expansion is underway. Similarly, an individual contemplating a career change or weighing fulltime employment versus attending college would be wise to consider whether the economy is expanding or contracting.
Capital markets, however, are forward looking and any publicly available information, including business cycle data, impacts security prices almost the moment it emerges. This is why the S&P 500 is itself a leading indicator of economic activity. Capital markets provide information regarding prospective turning points in the business cycle, not the other way around. To presume that one can assess information after its release and to hope to profit from it through trading or “tactical portfolio adjustments” is naïve.
Our conclusions are based on our research, which spans numerous business cycles, and on studies by others that show market timing fails in general. Most recently, Standard and Poor’s released results of their S&P Indices Versus Active Funds (SPIVA) Scorecard. SPIVA is a carefully constructed ongoing assessment of active management versus indexing. Notably, it tested a widely held belief that market timers can outperform benchmarks during bear markets because they can shift quickly into cash. The accompanying table taken from the SPIVA report, casts doubt on that claim.
Unfortunately, many high-profile economists have sold their souls to Wall Street and media outlets. Their arguments may sound impressive but they are merely recycling yesterday’s news, well after it has impacted share prices. Anyone who could predict where markets are going with any consistency would have no need to earn a living convincing others of his ability to do so.
Also In This Issue
Quarterly Review Of Investment Policy
Tax Swapping Time
Avoid “Buying A Dividend”
Capital Gains Tax Rates
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow Jones Industrials Ranked By Yield
Recommended Investment Vehicles
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